Investing is so difficult because as stocks go down, the level of risk seems to go up. But is that actually true?
In this week’s video, Casey shares data that shows how investor’s expectations tend to say more about what HAS HAPPENED not WHAT WILL HAPPEN. He then looks at how the market historically performs after going down 20% or more.
So, is investing more or less risky after stocks go down? Tune in to find out!
Show Notes
There Will be Drawdowns – Charlie Billelo
AAII Investor Sentiment Survey
Rethinking Risk – Jack Raines – Young Money
Watch This If You’re Under 50 and Saving for Retirement – Mullooly Asset Show
Is Investing More or Less Risky After Stocks Go Down? – Full Transcript
**Click here for a full downloadable PDF version of this transcript**
Casey Mullooly: In episode 314, we talk about the riskiest time to be an investor.
Welcome back to the Mullooly Asset Show. I’m your host, Casey Mullooly, back with you for 314. And no, right now is not the riskiest time to be an investor.
Investing is so hard because it’s really all about balancing the relationship between risk and reward. When stocks are going up, we only care about maximizing the reward that we get, and when stocks are going down, we only care about managing the risk.
It’s this endless boom and bust cycle. But if you get sucked into it, you’re going to wind up chasing your tail and probably underperforming the market as a whole and probably every other investor out there.
So, Jack Raines wrote about the most recent boom and bust cycle that has played out over the last two years here, and he wrote about how in 2021, we saw all of these speculative assets that people were investing in and how people were mocking other people, saying “Have fun staying poor” because they weren’t investing in crypto, NFTs, SPACs, these high flying growth stocks, and how that was really the riskiest time to be an investor.
Investors are really bad at predicting where the market is going to go over the short term. And they let recent results reflect that. If only there is a way that we could measure in aggregate how investors are feeling about the market overall over the next six months.
Man, I really wish that that existed. Oh wait, it does. It’s called the AAII Investor Sentiment Survey, and it’s made some pretty big headlines here so far in 2022. Right now, at the end of October, 2022, only 22% of respondents are bullish over the next six months. But rewind to a year ago, in October of 2021 and 57% were bullish.
I’m sorry, 46% were bullish, and in April of 2021, 57% were bullish. So, it’s funny how the results of the survey reflect what’s happened in the past, not necessarily what’s going to happen in the future.
Counter to these surveys results, Charlie Bilello, who we will link to this post in the show notes so you can check it out for yourself. He looked at what the S&P 500 does after it has fallen 20%. He looked at different time periods.
So, just want to share those results with you because I think they prove what I’ve been talking about here. So, 3 months after the S&P falls 20%, returns are 2%. 12 months after the average return is 16%, and it’s positive 87% of the time. 5 year average return is 69% and it’s positive 90% of the time. And the 10 year average return is 183%, and it’s positive a hundred percent of the time.
So, the riskiest time to be an investor is not after the market falls. That is the opposite of what it actually is.
But the key is to not get sucked into the highs and the euphoria, and also to not get bogged down by the lows and not take any risk at all. It’s really about not making decisions on either of these things and striking that right balance and maintaining it throughout.
So, that is the message for episode 314 of the Mullooly Asset Show. Thank you as always for tuning in. We’ll be back with you next week.